Prosperity and Depression.pdf

Nature and Causes of the CyclePart IIoutput and employment are not increased at all (the elasticity ofdemand for labour being zero) so that the amount saved is withdrawnfrom circulation-e.g., by repaying bank loans or by notcontracting new ones. The position' of the banks is therebyimproved: but, since we are speaking of a period of contraction,we cannot assume that the whole ofthe sums repaid will be re-lentto other borrowers. We are certainly nearer to the truth if weassume that at least a part will be used to strengthen the reservesof the banks.In order to avoid a post hoc ergo propter hot argument, we mustmake the preceding statement more precise. We may say thatemployment will, or may, rise to such an extent that wage disbursements(directly in the industry concerned, and indirectly in thepreceding stages through the purchase of raw materials and othermeans of production, etc.) are raised above the level which theywould have attained had the reduction in thewage rate notoccurred.This formula covers the case (which during a general contractionmay easily occur) of a wage reduction inducing an industry torefrain from contracting its employm.ent and pay-rolls by so muchas it otherwise would have been forced to do, so that the wagereduction does not bring about an increase in employment andpay-rolls in comparison with the preceding period but preventsit from falling to a lower level. The other extreme is then thecase where employment is not increased at all above the levelwhich it would have attained if there had been no .reduction inwages-a level, namely, which would probably be lower during ageneral contraction than in the preceding period-so that theamount of money withdrawn from circulation is greater than itwould be ifno wage reduction occurred.In the first case, thewage reduction has an expansionary influence,so that the contraction is mitigated or even reversed. In the secondcase, the influ~nce 1s de£l~tionary, and the contraction is hastenedand intensified.saved to improve or replace its equipment--or, in other words, if it wasconsuming its capital and the wage reduction puts a stop to such consumption.This is not, however, a typical case in a depression, since even theexisting equipment is not then fully utilised, though it is not denied thatcapital consumptin may be going on.